What cost a carbon price? ACCC oversight of carbon claims

The draft legislative package to implement the carbon price mechanism (CPM) released today by Government does not provide any new powers for the Australian Competition & Consumer Commission (ACCC) to take action against businesses that “exploit” the CPM.

However, the ACCC has been allocated an additional $12.8 million of funding over four years and will establish a dedicated team of more than 20 staff to police businesses’ claims regarding the impact of the carbon pricing mechanism (CPM).  The ACCC’s focus will be on preventing businesses from “exploiting” the CPM by using it as an excuse for price increases that exceed the CPM’s cost impact.

The ACCC ran a similar monitoring and enforcement initiative when the GST was introduced in July 2000 and, for businesses adjusting to the CPM, important lessons can be drawn from this experience.  However, early indications are that the lawfulness of businesses’ claims regarding the impact of the CPM is likely to be more ambiguous than claims about GST-related price increases, which may create challenges for ACCC enforcement and compliance risks for business.

GST experience

As part of the GST-reform package, a specific prohibition on price exploitation was created that prohibited “unreasonable” price increases that exceed the net effect of the introduction of a 10% GST and the removal of other taxes (such as sales tax).  This prohibition was subject to a sunset date and has since expired.

At the time, the ACCC ran a broad-based and highly-effective compliance initiative, which included various guidelines, a detailed communications strategy, the use of “public compliance commitments” by large corporations and an extensive campaign of monitoring and  enforcement action.  During the three year period around the introduction of the GST, the ACCC considered 51,000 complaints, investigated 7000 matters, obtained $21 million of refunds for two million customers, instituted 11 sets of court proceedings and accepted 55 court enforceable undertakings.[i]

ACCC powers

This time around, it does not appear that the ACCC will be given specific powers.  However, the ACCC’s general consumer law enforcement powers have been enhanced considerably through the Australian Consumer Law (ACL) reforms, the bulk of which commenced on 1 January 2011.

In addition to the general prohibition on misleading and deceptive conduct, the ACL specifically prohibits false or misleading representations with respect to the price of goods or services.[ii]  Generally, a claim will be misleading if it conveys a misrepresentation that is likely to cause a reasonable member of the target audience to believe something that is not true.  Importantly, it is irrelevant whether the business intended to make a false or misleading statement or whether anyone was actually misled.  These are longstanding prohibitions and provided the basis of much of the enforcement action taken by the ACCC in relation to the GST.

The recent ACL reforms relevantly enhanced the ACCC’s powers by allowing it to:

• seek civil as well as criminal penalties for false or misleading representations of up to $1.1 million for corporations and $220,000 for individuals;
• issue “infringement notices” specifying a penalty of $66,000 for listed corporations, $6,600 for unlisted corporations and $1,320 for individuals, to an resolve enforcement matter – payment of an infringement notice does not constitute an admission and prevents the ACCC from taking enforcement proceedings; and
• allowing it to issue “substantiation notices” requiring proof of a claim or representation to be provided within 21 days.

These reforms represent significant enhancement to the ACCC’s enforcement “tool box”.  As it did for the GST, the ACCC will explain how it will apply these powers in the context of claims about the CPM by publishing guidelines for industry.[iii]  

What CPM claims are likely to cause issues?

The commercial attractiveness of attributing a price increase to the impact of the CPM is obvious.  It is also likely that some businesses will seek to use their commercial response to the CPM to provide a competitive advantage – as discussed below.  It is desirable, from a policy perspective, that businesses will compete on the basis of their “carbon credentials” and that the CPM may provide a relative commercial advantage to businesses with a smaller carbon footprint.  However, the ACCC (and competitors) will be watching to ensure that carbon claims are legitimate.

The CPM provides fertile ground for both abuse and unintended errors in marketing claims.  The precise cost impact of the CPM to a given business will be affected by factors such as whether it or its suppliers are directly affected by the requirement to surrender carbon permits, the relative carbon efficiency of a business, decisions to pass on or absorb cost increases, and eligibility for industry assistance.  As a result, the accuracy of claims regarding the CPM is likely to be more uncertain than claims regarding the GST, which applied in a more linear and predictable way.

Drawing on experience with the GST, examples of CPM claims that are likely to be unlawful include:

• claims that overstate the impact of the CPM, such as by referring to the carbon price in the context of a price increase that exceeds the impact of the CPM;
• “beat the price increase” claims that encourage customers to purchase goods or services before the CPM commences, if the CPM will not impact the cost of those goods or services or if the claims overstate the impact of the CPM;
• increasing prices to adjust for the CPM before its commencement;
• attributing price increases to the CPM in circumstances where suppliers have chosen not to pass through carbon costs;  
• using carbon or greenhouse-related imagery (such as smokestacks) in a way that implies a price increase is connected with the CPM;  
• incorrectly calculating price increases to adjust for the cost of the CPM;
• claims that refer to a requirement to acquire carbon permits where the CPM does not apply directly to the particular business;
• claims that do not properly take into account free carbon permits or other industry assistance;
• potentially, passing on a price increase that a supplier claims is related to the CPM and relying on that information to make the same claim to customers;
• assuming that carbon-related price increases claimed by competitors will necessarily be applicable to other businesses in the same industry; and
• casual comments by sales representatives that incorrectly blame the CPM for price increases.

How to comply

As with all business representations, all claims regarding the impact of the CPM must be accurate and capable of being substantiated.  Careful examination of the basis upon which a carbon claim is made, appropriate qualification and consideration of the overall impression created by the claim is critical.  Consideration of the business’ own circumstances is critical.  Broad-brush or general statements made by others cannot be the basis of a business’ claims about its own pricing.

There is also a need to implement compliance systems to deal with carbon claims – or, preferably, to incorporate carbon claims issues within existing compliance systems.  This should incorporate training programs to educate executives, marketing teams, sales representatives and other customer-facing employees, as well as processes for the documentation, verification and approval of external carbon claims.